SEATTLE — Responding to outraged residents who poured into the streets after fighting off tear gas in their neighborhood, Seattle officials Thursday eased the state of emergency that has paralyzed the inner city--allowing at least two protest marches and scaling back the columns of riot police that have blockaded downtown intersections.

"We need to put an end to this. We need to talk," Mayor Paul Schell said wearily after a police crackdown against World Trade Organization protesters prompted the backlash in which hundreds of residents came out of their homes and faced off against police.

After a night of confrontations that left some residents of the Capitol Hill neighborhood crouching on the floors of their homes, city leaders faced a barrage of angry criticism Thursday morning. Schell--facing a city as distraught about the police crackdown as over the WTO protesters who have dominated the streets--pledged to "start the healing process."

"Our primary goal is to regain and maintain peace in our city," the mayor said. "But we are still in a state of emergency. This is not business as usual. People must understand that."

A 7 p.m. to 7:30 a.m. curfew went into effect for the third straight night Thursday, but police dramatically scaled back their tactics, if not their numbers. A day after marching through rush-hour traffic--armed with billy clubs and hurling tear gas at protesters in the city's famous Pike Place Market--police on Thursday issued a permit for one downtown rally and provided a motorcycle escort for illegal demonstrators marching from Capitol Hill to the downtown jail.

Hundreds of protesters surrounded the jail throughout the day seeking the release of more than 500 who have been arrested since demonstrations began. After a long standoff, the protesters left voluntarily after the city agreed to allow legal advisors into the jail to meet with the detainees.

Schell shrank the police perimeter around the WTO talks and said he would consider reducing the bounds of the curfew zone--which now extends over the entire downtown area--and would open a dialogue with protest leaders to make room for peaceful demonstrations and marches.

Curfew Moves Protest to Nearby Community

The turning point came in the predawn hours Thursday, when an eclectic neighborhood of artists, musicians, political activists and students came under siege until about 3 a.m.

According to police, a group of 200 to 300 WTO protesters--edged out of downtown by the curfew--moved into the streets of Capitol Hill, where they blocked two major intersections and threatened officers with rocks, bottles and Molotov cocktails. Several windows at local businesses were smashed. At least some protesters charged the police line, department spokesmen said.

By then, the conflict was in the heart of a residential neighborhood. Helicopters with searchlights swooped overhead as tear gas canisters, concussion grenades and rubber bullets whistled through the streets.

Gradually, witnesses said, people began coming out of their homes and joining the protesters, until the crowd grew to nearly 1,000 people--a large number of them residents with no connection to the WTO protests.

"I was rousted from my bed at 9:30 at night by bomb blasts," said Mike Maloney, a laborer. "I came out from my apartment building and . . . was told to return indoors. And when I asked why, I was sprayed with pepper spray."

"We were so mad that they were kicking people that my husband and I went out and walked around. We thought if there were more people out there, they would be less likely to kick people," said Nancy Edwards, a coffee barista who lives on Capitol Hill. "The helicopters kept us up till 3 in the morning."

Residents told of being chased down side streets and pepper sprayed and of being tear gassed in their own yards.

"I got gassed on my way home from work, way down where no demonstrators were. I could not get home. I was crying hysterically. I'm still shaking," said Rachel Golden, a research assistant at a Seattle marketing firm. "Everybody was yelling at them, 'We don't hate you, we just want to go home. We want our neighborhood back.' But everywhere I'd go, I kept getting gassed.

One woman told of being pepper sprayed as she emerged from an Alcoholics Anonymous meeting at a local church. Several residents pulled out handfuls of rubber bullet pellets they found in their yards.

"We had to stuff rags under the door," said Damon Krane, who said his house was shot at with rubber bullets. "We laid down on the floor just shaking. I know this sounds silly, but we were trying to figure out escape routes from our own house."